ACI Worldwide Inc (ACIW) 2008 Q1 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time I would like to welcome everyone to the ACI Worldwide financial results, Q1 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like the turn the call over to Tamar Gerber, Vice President of Investor Relations, Ms. Gerber you may begin.

Thank you, Phyllis. Good morning and welcome to the ACI first quarter conference call. Joining me today as our management speakers are Richard Launder, Mike Vipond in the quarter and Scott Behrens. Richard will be reviewing global sales, and Mark will be discussing product development in the quarter and Scott will take you through the financials. Phil Heasley is also on the line and will be available for the Q&A, after our prepared remarks. As usual our customary Safe Harbor and forward-looking statement language applies to this call. A full discussion of our forward looking statements can be found on our web site or at the back of both the earnings release and presentation we issued this morning. I will now turn the call over to Richard to open up discussion of the quarter.

Thank you. Good morning. As Tamar said, I will review the sales for quarter one, from a general point of view. I will say a few words specifically about the channels, and then give you an update on our IBM alliance performance and how we are moving forward in that very significant partnership for ACI. I would start off by saying in a sense it was a pretty typical quarter one in that way, the sales lower than the average quarter. That is normal for our first quarter. The numbers we put forward there actually compare us to the same quarter last year, but it is worth pointing out that was actually our quarter two last year, because we changed our year end prior to that. We are not really comparing apples with apples in that sense. A number of factors that affected our performance and results. We should point out we finished an exceptionally good quarter for full at the end of 2007. It was a record quarter for ACI, and a lot of business was closed in that quarter.

It was with that background we moved into quarter one. Also timing is always a critical issue for us particularly around term extensions and major new sales in the sense that they can vary from quarter to quarter and result in ups and downs in our numbers. I'll say a few more words about that in a minute as we did have a couple of major deals that weren't closed in quarter one, but I will come back to that later as I said. Also quarter one this year was different from quarters, in the huge amount of time and investment on the sales force went into our IBM partnership and relationship. I will talk about that later. Significant progress was made and we have made a good start to that partnership.

There were some points worth mentioning, our our visual product sales were maximized. We had a very good quarter in that respect particularly in Asia-Pacific and a good result in using our global distribution network to sale those products, so good success there. Also in terms of looking forward we do and are planning for considerably stronger Q2, 2008. I know the pipeline well we look at our pipeline and we will have a much stronger quarter, already having some good results. So in terms of, in terms of our general update, I think that's all I would say at this point.

Moving on to the channels themselves and a few comments you have the break down of the channel performance. I have already mentioned the success of Asia Pacific with our (inaudible) product. They also got a couple of large deals in Thailand and Korea. EMEA had some term extensions but not to the same degree as 2007. I stress that's a timing issue in many ways. The services sales were driven by the timing of larger deals. Americas term extensions had a few but once again not to the same degree as 2007. There will be some in this quarter, that will make up for some of those numbers. I stress its timing again. For a quick update on the channels, let's move to the IBM alliance and we are. We already had some success in signing a new customer on system P, but I am pleased to report one deal I referred to in Q1 we hoped to get has closed. It is a very large processor in Spain, called Sistema. It is a significant win for both IBM and ACI and it will run on the IBM E series. We have railroad pleased with this very significant win. It is a major opportunity win for ACI.

In term of the more day-to-day work in the partnership and putting us together. We've had a number of significant activities. Our sales forces spend time together, our marketing people spend time together working on how we move forward. So, we've done a lot of work on looking at how we go to market from a geographical standpoint, from a product standpoint and from account planning point of view looking at the major opportunities for us and how we work together. We have done a lot of training both training IBM on our products and vice versa. And as part of our moving forward as a company and understanding our sales pipeline, which is very significant in working with IBM but also important to us, we are sales force, we will help as many and understand our sales pipeline much better than we have done today.

We have also made a very significant announcement to our customers in the sunset of all of our payment solutions and we are moving in due course towards BASE24-eps. We have communicated that to all our customers across the world. Also we are going through planning exercises and reviewing a number of targets, target customer, countries we should work in and prioritizing those. We are working on the plan for senior executive on our top 50 target customers and we have now actually identified and working hard on a number of system details in our 2008 pipeline. As I started off this call by saying, these are always long sales cycles and often slip in the timing. We are confident we will win a number of major deals this year with IBM on Z platform. So that's all I have to say in term of the general update. I will be here for question-and-answers later on. On that note I'll pass over to Mark Vipond.

Thanks, Richard. Good morning everybody. I will give you a brief update on some of the key activities relative to the global product deployments. If you flip to slide number nine, this is a standard chart we have been producing for the last few quarters for this call that shows the number of customers we have by solution area, meaning retail banking, wholesale, risk management, by geographic market, and also by key industry segments.

Going on slide number ten, also some statistics we have been providing on a quarterly basis. We have 2.7 products for average customer that uses 2.7 of our different solutions. We hope to continue to increase that number as we go forward and cross sale additional applications to our existing client base. In the quarter March we added six new customers, sixteen new application sales during the quarter. And we also added two country, Romania, which obviously have today from a development and service standpoint but from a customer perspective, we have our first client in Romania and in Kyrgyzstan, we also have our first client, one of the Soviet Union countries that came into existence a few years ago. That now brings us to customers in 88 countries with a total of 808 customers using ACI solutions with 2189 products deployed across that customer base.

On slide 11, I just give you a keep update from the various solution areas we are focused on. Starting first with the retail payment solutions, Richard made reference to the fact that on March 24th, and we announced it publicly on March 25th, we began announcement of the maturation of our retail payment engines. That included OCM 24, on to open to ASX all of which had been acquired over time through various company acquisitions, and also BASE24, with the intention to move all of those clients over to our BASE24-eps product. That is the culmination of the story in the planning we have made with our customers since 2002 saying we would we eventually migrate all of them to BASE24-eps. We started that process with the formal announcements at the end of March. A lot of work has begun to start that migration planning.

This is being done in concert with IBM. We have a mechanism called the payments transformation team where we have staff from both ACI and from IBM participating with our customers to start the migration planning over to the BASE24-eps system. Also during the quarter we made significant progress in the Z enablement. Part of the IBM partnership was enabling our products, our suite of products to run on the IBM blue stack as it relates to the retail payment solutions in June though year. Next month we will be releasing the next release of BASE24-eps which will be optimized run on Z and also incorporate the blue stack come component as well as DB2 as our data base engine.

On the wholesale payments solutions side of the market place, we continue to have good sales and market opportunities, quite frankly in all regions. You saw that in Asia-Pacific we had good results in the first quarter of the year. We also have opportunities in EMEA as a result of the SEPA initiative but we are also seeing an up tick in the United States in terms of opportunities. In fact, I am out in California for the next couple of days with a select group of key customers and in the wholesale payment solution area. And we are seeing very good opportunities startling to materialize in the United States for our wholesale strategy as well.

One investment area is the hub, which is a common industry term which is basically a mechanism of infrastructure for bringing payment systems or payment into's a common system structure. We are seeing opportunities in there and we are making investments in the hub and quite frankly in concert with IBM. We are trying to use as much of their infrastructure as possible to focus our efforts on continuing to extend our business services the functions we provide that the customers need and let IBM make as much as the investment as possible in the infrastructure that is needed to tie them all together.

Also on demand I put this in the wholesale payment solutions because most of the on demand customers remain in the wholesale area, we are going to leverage the IBM data center and data centers operations around the world for delivering our on demand capabilities. That's very key for us and for, we believe the expertise IBM brings in terms of data center and operations far exceeds that is we have available in our current organization. So one of the key parts of the alliance was to leverage that in concert with our expertise in payments and we are starting to do that.

In the risk management solution area, enterprise risk potential continues to be huge. We see ourselves in a very advantaged position in terms of what we provide within our solution to address enterprise risks. We continue to make investments in that area to take advantage of the marketplace. And we are looking at options to accelerate that investment. Again, in concert with IBM because we think we can increase our sales and results with the customers by bring tag to market sooner.

We are also introducing a new version of our automated case management solution this early summer. This is very important because as more and more customers are taking their risk solutions across the entirety of the enterprise, they are looking to go have a case management system that also will automate the process of handling any fraud conditions or fraud cases. So we've had a solution for a few years, we are taking a quantum leap forward in terms of capability with the version we are coming up this summer. Also ream time rules and the scoring of transactions, we haven't talked about this much. But we can now in that part of the IBM partnership was optimizing our risk management capabilities with a new technology they have coming out called Z cell, which we believe will allow us to practically let customers score every transaction in a very cost effective basis. So we have been working with IBM to take our risk management capabilities and optimize it on the Z cell technology which quite frankly will give us an advantage position in something that's not available in any other platform or with any other solution.

Flipping to slide number 12, in term of focus areas for the next 12 months, key areas we are watching is one the IBM optimization enablement and also driving that into market success. I mentioned the BASE24EPS, I mentioned what we are doing with PRM, IBM. We are also optimizing our wholesale products and there are a number of enablement efforts underway. It will take over two years to complete all of them, but we continue to focus on that, it is a big part of our resource commitment and investment we are making as a company. We also continue to focus across the globe on service revenue and margins. We quite frankly have increased some of our rates to be more market sensitive. We were probably below market in terms of the charges we were commanding for our services and that has changed and we are start to go see results from that.

The big effort that we have going on is the migration for our retail payment customers. Obviously the announcement of the maturation of our legacy systems is a very big item for our company and it certainly is for our customer, it will take us years to migrate all of the customers over. The timing of the migration of those customers in terms of the maturation of our existing products is over the next four years. And so we truly believe it will take that long to migrate all of our customers over if not longer in some cases and obviously the investment in the payments transformation team with IBM is significant in facilitating that migration.

Also the wholesale payments solution strategy investment, the investment in what we call the infrastructure hub, the messaging hub is very important. It allows us to expose more of our business services and service oriented architecture approach for our clients and also looking at extending the capabilities we provide by developing new capabilities on that architecture and hub such as file transfer type capabilities.

Customer satisfaction is always a key focus area for us more so now than ever from a standpoint as we talked about many times in the last few quarters of the multi product deployments that our customers are putting in place. It introduces a level of complexity and also a level of project times we want to get those live with our customers not only for their satisfaction but also so we can harvest the backlog associated with those projects.

Also finally enhancing the ACI brand. We are looking at our ten-year product strategy and where we are going as a company in terms of evolving our solutions to a service oriented architecture approach. That will take years and obviously with our customers we have to evolve them to those types of solutions. As part of that effort we will be, we are looking at different branding of our solutions and making sure we have common terminology we use to reflect our position and our capabilities in the marketplace. You should expect from us in the near future that we will be disclosing those branding equations and the mechanisms we are going employee both to our clients and to the investment community. With that I will pass it over to Scott to go through the financial review.

Okay. Thanks, Mark. Good morning everyone. Let me start with the key financial take aways for the quarter.

Starting on slide 14. As Richard previously described sales were down on a sequential basis for the first quarter of 2008. That was following a record sales quarter in the fourth quarter of 2007. However, we do think that the second quarter is looking pretty good, as Richard mentioned we are very excited with the signing of the SERMEPA relationship this past week in the EMEA channel.

Moving on to operating free cash flow, inclusive of net proceeds from the IBM alliance, operating free cash flow was $45 million in the March quarter compared to $18 million in the March-quarter of 2007. Excluding the net proceeds from the IBM alliance, operating free cash flow was $9 million which is clearly down compared to March of 2007. But was in line with our expectations. Driving this decline is higher cash expenditures from our investment in the services personnel really for two main drivers there. One is the implementation services which is a response to that higher rate of new customer sales that were booked in 2007 as well as the ramp up of personnel levels to support the various initiatives in our relationship with IBM. 12 month backlog increased $11 million in the March quarter of 2008 compared to December of 2007. That sequential growth, this increase is primarily driven by projects moving into the 12 month view and therefore closer to GAAP revenue recognition. I will point out that $3 million of the increase was driven by favorable movements and foreign exchange rates during the three months.

Revenue increased almost $3 million compared to the March 2007 quarter. This was driven by $4 million increase in recurring revenue and that would be monthly license fees, maintenance and processing services, processing services being a sub component of our services revenue ,offset by $1 million decline in the initial license fee revenue.

Turning to slide 15 this quarter saw a slowing of the overall rate of deferred revenue growth. Overall, I mean the total combined short term and long term revenue. We did see a shift from the long term to short term deferred revenue. That shift was approximately $19 million similar to my comments on the 12 month backlog movement this is an indicator of projects moving into the 12 month view and therefore closer to GAAP revenue recognition. Overall operating expenses were up $3 million in the March '08 quarter compared to March of '07. However excluding certain prior year expenses related to our stock option review, our operating expenses increased $9 million driven by primarily by our services personnel. In addition we had higher distributer royalty costs, higher professional fees, compared to the prior quarter. We also had higher expenses related to our on demand initive. And we had approximately $1 million from acquired businesses that were not included in part or in full in the comparable period in March 2007. Other income and expense was essentially flat quarter-over-quarter as our losses on our interest rates swap, were more than offset by favorable foreign currency exchange gains.

Now to move on to a discussion of our revenue the quarter which is slide 16 in the presentation. As you can see backlog was a important contributor to the quarters GAAP revenues, and we booked much more business out of backlog this year than in the prior quarter. This was due to a number of factors including the decline in sales but also the sales mix. We had fewer total sales and fewer term extensions and both of them products lend themselves to rapid revenue recognition for at least a part of their contract value.

Over the past five quarters, we have actively moved toward selling multiproduct application solutions and fewer tools. So, you won't see as many quick GAAP revenue contributions out of our current sales as we used to book. Richard did say in the September, in September on one of our earnings calls we were seeing a 20% current period sales move or fall through into GAAP revenue in that quarter, June I believe. At that time a 20% figure was a, was a reduction compared to how we had experienced in the earlier years. Now we are start to go see that number down in the teens as far as we can anticipate this year's sale cycle to be looking. Certainly this quarter we saw 11% of sales move into GAAP revenue. And there will be some variations in that sales figure depending on term extension, capacity deals and things like that.

Also important to know is that as Richard said we did expand a significant amount of time of our sales force during the quarter revisiting potential customers to share with them the details of our IBM alliance and what benefits it can bring to their organization. So we had a shift in focus away from closing some of the deals and working on communicating the benefits of the IBM deal.

Turning to slide 17, this is a slide that we know interests many of our investors. Basically we have been asked by many of you how we look at our cash margin and what factors into it. We define cash margin as operating free cash flow, which is metric that we have taught you for some time, divided by what we call cash revenue and that is calculated as exported revenue plus increases in deferred revenue minus increases in accounts receivable.

This chart shows kind of a three-year view in addition to the current quarter view. As you can see we did include the IBM cash in there because we are incurring expenses in diverting some of our headcount resources into projects which are solely IBM alliance focuses and we thought it was inaccurate to move the IBM cash from operating free cash flow if we were not able to remove all of the commensurate costs. IBM obviously is a source and end use of our cash in our business right now.

Clearly if you look at the 2008 clearly we are a front had-loaded in term of operating free cash flow due to the cash received from IBM in March. We told you this on the fourth quarter call and that still holds true. This year, operating free cash flow will be front loaded and revenue and sales will be more second half loaded in the business. We think the 1.5 times cash to revenue metric, that we discussed in February, is still a good one when looking at 2008. But not necessarily in our outer years. We start thinking about 2009 and how IBM and potential revenue will impact 2009 model and beyond. The 1.5 times ratio may not hold as true in the later years. But this is obviously a forward-looking number and we are not in a position right now to modify it since we have not revisited our long term strategic plan side by side with the alliance model now that it is operational. So we have targets and joint selling plans in place now but we will see how the relationship unfolds this year.

Turn to go slide 18 this is a recap of the outsourcing deal in March. We will see some CapEx savings as a result of this deal although we will also incur transition expenses some of which will be cash, some will be paid out over a five year period. And we will also incur cash severance expense as well this year. We obviously still control our IT software, but this outsourcing deal will take care of facilities and hardware needs particularly as they pertain to the wholesale products solutions. It is an estimated $116 million deal over the expected seven-year term. And we are estimating that the agreement will deliver us operating savings of 25 to $30 million over the course of the contract.

Turning to slide 19 we had a very aggressive share buy back program in Q1 and achieve a repurchase odd over 1.6 million shares. We have some remaining capacity, 56 million remaining on the buy back authorization available for us to utilize under the guy lines and parameters set out by our board under a 10B51 program. The rest of the slides are appendix slides we provide for your information. We also provide them in the press release as well. This completes my prepared remarks. I'm going to turn the call back over to the operator for q-and-a.

(OPERATOR INSTRUCTIONS). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of George Sutton with Craig-Hallum Capital Group.

Hi, guy, a couple of questions. First on the pull through that you mentioned of sales bookings in the revenues that had been 20%, we talked about that at length at the analysts day. I am curious what has changed to quickly to have that result in the teens expectation for this year.

I will take that. Well, first of all, obviously we have a lower sales amount. So even if you had a constant percentage of flow through of sales on a year-over-year basis, your sales are down to the absolute dollar that's going to flow through is going to be lower. It is also a matter of the product mix. That being lower term extensions, as well as the tools. Those have a faster flow through to GAAP revenue than some of our larger implementation more multiproduct, more complex implementations. So, as that product mix changes, that also impacts the percentage of flow through in the current period. So but what this does point out is reliance more on the backlog and which is obviously more stable, more reliable source of recurring revenue than current period sales.

Scott, I think you might, may have answered my next question related to sales expectations for the year. Yes, they were lower in the first quarter but does that necessarily portend to change for the full year?

I don't think at this point we are, you know, we are early in the year. Obviously we had a significant refocus of attention just following the December signing of the IBM deal. So we had a this it in some of the attention and focus of the sales resources here in the March-quarter. So, no at this point I think it is too early to say, we don't expect this to take us off course. We feel we are still tracking to the sales figure we previously provided.

Okay. Last question.

I would just sorry. Could I add a few words to that as well? Obviously until contracts are signed things are never done. But the pipeline is very healthy, therefore our expectations are good pr the year.

Okay. And regarding your optimism related to Q2, how much of that is coming from faster pay is there anyway you can quantify that for us?

George this is Phil, I will let Richard answer after me. Faster pay is come to revenue, it is not coming to sales. But we do the sales faster pay last, kind of same quarter last year. So, and I guess you can some of them were even earlier than that. So they're on the other side. Now the pig, they're the pig coming out of the python not the pig going into the python. We are still looking at second quarter in terms of those. We did tell you we signed and in the first quarter,. I am not going to tell you the dollar amount, but it would have significantly changed the first quarter. The only culvert there was no big deal signed in the first quarter. Several people have asked me. I have gone around and talked to some of our owners, what I believer, do I believe this slowdown. The one thing we didn't say that I would add is I do think all at least our major customers went back and checked and double checked their capital spending. We do have the banks as our major customers. They checked and double checked and triple checked their capital expenditures. And we have not seen anything canceled but I do think things we thought could close in the first quarter have been closing in the second quarter. So there certainly was a relook capital expenditures first quarter.

Perfect. Thank you.

Your next question comes from the NiK Fisken with Stephens Inc.

Good morning. Can you giver us more detail, I don't know who wanted to handle this one ,on the higher professional services costs? I am wondering how much of that went toward getting ready for IBM, how much toward working through the backlog, any severance in there et cetera.

I will talk about it and then maybe Mark and Richard both will want to talk about it. A year ago we told you that we saw increased demand coming down and probably the clearest thing we did was we added 110 engineers in Timisoara,Romania. So we in effect took on a cost that was coursing through last year. Last year at this time it was probably close to 0 or much closer to 0. We added a large staff there. We also purchased a distributer in Kuala Lumpur which added and we purchased visual web that added 250 people in India for us.

And we very much realize that as we go through the cycle that we were going to have a much larger service business and we also had to get ready to support the IBM deal although a lot of those expenses are coming through this year. We made a very open minded decision that we had to bring these people on and train them. Which we have been doing for the past twelve months. As you see in the backlog, the 12 month backlog, you are getting to see it grow and grow and you see the 16 month backlog grow last year. These are the resource that are working on these projects that are working their way through the system right now. Plus we have increased our R&D as it relates to these ten projects that we are working on with IBM. Some of that is going through our balance sheet on equity accounting but we have also, we are also increasing our energy in the wholesale side and on the PRM side over and additional to that. Do you want to say anything, Mark.

No, I think you got it right.

It went up $4 million sequentially. If you look at the number it went up $4 million sequentially and I am wondering if you can comment on the outlook on that on an absolute basis.

Well, what we went though on investor day, we said gee when we put on these new projects it takes 18 to 21 months for these projects to be done. For those 18 to 21 months, we pay probably, I don't know maybe Scott will correct me. We pay 85 to 90% of the current cost of installing those and we expense them at the time. As we go through and then once they come out, right, we get paid back for some of our services and then we start receiving and most of these cases monthly license fees. And I think if you look at the balance sheet and the income statement, the pigs going through the python in a pretty orderly fashion. You are watching 12 month backlog go up you saw the 60 month backlog go up. You saw the deferred revenue go up, accounts receivable pretty much flatten out. You sue monthly recurring re knew go up by $4 million then you saw the puffing type revenue go down by 1 million. So, nick, I think you lay out the balance sheet and income statement and it is making sense. It has an underlying investment to it. We can't put on all of this business without investing, without investing behind it. Some of my managers think I should be investing more.

Nick this is Scott, and obviously we had a very strong sales year of '07 and in particular the December-quarter, and if you recall, we have what we are going through right now is essentially a ramp up of the service implementation. We have a mismatch in terms of timing of the cost of those implementation versus the GAAP revenue recognition which will be at some point in the future. We are start to go see the ramp up of those implementation services in advance of the GAAP revenue recognition.

Fair enough. On the Sermepa win, I know this is a tough question, but what kind of details can you give us? Were they always on, going to run IBM who who brought who to the table, size, anything you can give us.

I will give you a little back ground on it. No, they were not reliant on IBM for this aspect of the business. They and they're underlying banks, this is a switch, many of the large banks are part of this as well. They certainly had an IBM relationship. I think IBM would probably give us credit for being the initiator in this process. We have been talking to them for quite a long time. And of course, El [Cordongle] who we were also putting on to a based the largest credit card issuer or second largest in Spain, I'm not sure which one they are, and I think that and a big IBM customer. So it was certainly a joint effort between us but we probably, we probably had as much or more bringing this one to the table than they did.

No comment on size or anything?

Well, let's put it this way. It would have very significantly, in our language, this was to be considered a very, very big, we don't do deals much bigger than this, all right. It is the best way. I mean we can't give you anymore descriptive than that but we typically don't do deals bigger than this.

Last question, this has been a topic we have talked about in the past. Can you give us what you think your cash margin will be once the business normalizes?

Well, let me talk you about the $30 million in IBM. If we can go and make that whole deal, make it, you would see that a lot of our expense increases and a lot of our balance sheet cash increases. So cash from both sides are really, I'm not going to say they're going be $37.3 million but they're certainly not going be zero. But a very large portion of that cash is actually forecast in terms of actives and whatnot that we have going forward. So from a margin standpoint, maybe, the well deal with IBM was we get cash if front of because we have such delayed revenue recognition process. That we were going to get cash if front of, we were going to get front loaded to cash so that the company didn't have a cash risk in terms of what it is doing. So, if you were were to look at this, forget last year, but if you look at this on a 12 or 18 month kind of basis, I don't think the, I don't think cash that we have, we received is going to have any major change in what our net cash positions would be after that time period. So if we have four or six months more cash as from IBM then we are going to need in this 12 months, that view that's about as accurate as I will get. I will not be anymore descriptive than that. Did that help you?

Sure. Yes, it does. Thank you.

If it doesn't I told you that half of our, half of our increase in costs this year were going to be IBM related. I am telling you that if you take that plus the cash impact of our balance sheet, and you get closer to that $37 million than you get to half of it.

Okay. Fair enough. Thank you.

Your next question comes from the line of Gil Luria with Wedbush.

I wanted to get an understanding of the timing. Scott you talked a lot about this on the analysts day of how revenue and cash come in for various deals. Using this Sermepa example, when would you expect the big impact for cash to be, and when would we expect the big impact on revenue to be?

It is obviously a large deal. So the impact on the revenue will obviously be dependent upon the obviously it is a size issue. In terms of revenue recognition, we would estimate ur implementation period. In terms of the cash, again that's dependent on the cash milestones that at one point we hit those milestone targets. We look at receiving approximately a third of that cash of the contract value, a third of that over the call to one year plus implementation period. Obviously this as large a deal as Phil said that we have entered into. It can be longer than our historical implementations.

So 18 to 24 months is probably when you start within 18 to 24 months you start recognizing refer nigh, maybe as much as a third of the cash over the next 18 to 24 months.

I would say that's right.

That's very good. That's knowing the contract probably even better than I will say not better than Scott. But figure a third of the cash in the next 18 to 21 months. And then start to see revenue recognition at 18 to 20 months I think would be as accurate as we can get today.

That;s helpful. I think the two metrics you are guiding on now are cash flow for the year, and rev log. Are you standing by the $65 million cash flow guidance for the year and does that include the $36 million from IBM?

Yes to both.

And then on the rev log guidance are you keeping that to same two?

Yes, right now we are.

Great. Thank you very much.

Your ne question comes from the line of Leonard Zeprofo with Janney Montgomery

Hi. All my questions have been answered. Thanks

(OPERATOR INSTRUCTIONS). You have a follow up question from the line of George Sutton with Craig-Hallum.

One of the things that you said on the call today which was certainly new to my ears was the up tick you are seeing in U.S. activity. I know you have made some people changes there, could you just address, it has been for so long, what are you seeing specifically in the U.S. that's picking p?

We have quite a bit of management changes. We have Ralph Dangelmaier in there. Number one, he has a tough past and two he's doing a good job. Some of your problem is that we have such high market share in the United States in our core products. And I think part of it has been we just needed a manager Ralph's stature to deal with a lot of the aspects of the business. We have latently a fantastic services business around our intellectual property in terms of our installed base. And I think that that is being approached in a logical and good manner. I think our on demand business especially as we migrate out from just the commercial offering that we have purchased and we start offering it to others. Right now that is actually, that is actually hurting us in terms of we are spending more money than we are getting in.

But we do have our first wholesale customer coming on board. We added a retailer and which a that you is going very well. And we are begin to go build a nice pipeline there. So, we have that part of the business, and I just think that Ralph has expanded this, the horizon of our people to see that there are other market segments that we own the cores, but there's a lot of other pieces we could be building. I think they're working pretty industrious toward that. I mean we I'm not going to, we are not going to be having any big celebration in '08 in terms of the U.S. In '09 we might have some big celebrations but we are rebuilding very nicely. And I think in '09 we are going to see some really good results.

One other thing if I can, Mark had mentioned you may accelerate investments in the risk area potentially with IBM. Could you give us more of a sense of what you might be considering there can and how significant?

I will talk about that.

It is not actually an issue that we might. It is we actually are and we are doing some ourselves. Mark do you want to go through that?

Yeah, part of the agreement with IBM, we couldn't talk about it before but we can now because IBM has announced their z cell was to optimize our risk management solution utilizing their z cell technology. That's one of the enabling agreements that was contemplated in the agreement with IBM. So that's already underway. We are doing that work. What I was referring to is we are also investing in enterprise risk. The market place like in retail, like if wholesale and risk management, you are seeing consolidation and convergence of systems where historically customers have deployed a credit risk system, a debit risk system and money laundering. What we are seeing in the market place is the desire to say no I have to look at my equation across my enterprise. Most of our customers in the market in general have deployed point solutions for risk management and they're looking to say hey I want to migrate to an enterprise risk solution. And we have a capable of doing that today. There are enhancements that we have to make that even a better solution and differentiated solution in the marketplace. We are making some investments in there today but what we are looking at is should we accelerate that investment to get at the market sooner than what our normal investment levels would allow. So we are going through that analysis right now to say what can we afford and what makes sense and where's the market driving and how fast do we need to go. I can see where we would potentially make decisions to make that investment, not a ton, we don't need to invest a lot more. But it would be nice to have a solution rather than have it in 18, 20 months to have 12 months to capture the market potential.

Last clarifying question. It sounds like more of a internal build.

Yes, most of that is internal build. But IBM would look at that and say that is needed in the marketplace and there is an opportunity for both of us if we make that happen.

Super. Thank you.

Your next question comes from the line of Clinton Yarha with RS Investments.

Morning guys, thanks for the disclosure around the cash margin. I was just wondering if you look at the historicals that bounced around from anywhere between 11 to 15%. As this business stabilizes the next three to five years would you be able to share how we shall think about the long-term potential of where cash margins should land?

Clinton, this is Scott. We are going through right now is the process of looking at our beyond 2008. So we are looking at our plan and really merging that with where we see the impacts of IBM. We are five months into the IBM alliance. We have also entered into a out sourcing arrangement. Which we expect to provide cash savings perspectively. We have to merge those together. And we are going through that process right now to giver us visibility into that what should be beyond 2008.

Would it be safe to say versus historics you expect it to be significantly higher in the future?

At this point, we are not prepared today forecast beyond 2008.

Well, Clinton, this is Phil Heasley, at any point if you go back to 2005 when we probably had somewhere around two-thirds of the stated revenues and about half of the revenue potential that we have today, we had high margins, because we had little to no investment in new business. So, as the impact of new business coming on board and this 18 month phenomena that gives you some cash relief but not good cash relief. You get to the point that's less impactful then by definition, the cash margin is going to go up. I am not going to say more than that, but if the model we have today is reminiscence, if the under lying model of both, and the fact we are not I would add another one. We are not pulling backlog forward to get cash and earnings the way it has been done in the past, and you are going to end up with higher sustainable cash margins.

That was helpful. Thank you very much, guys.

Your next question comes from the line of David Parker with Merrill Lynch.

Good morning everyone. You have already stated on a previous question that you are still comfortable with the 2008 guidance for operating free cash flow and also the rev log growth. Just so we are fully clear, I think the rev log growth you anticipate in 2008 is $200 million. Just so we are clear, where are we at at the end of the first quarter. Can you calculate that for us?

You mean the growth for one quarter?

Yes. You anticipate $200 million for the full year. Where are we at after the March quarter?

I don't have that with me. We will have to get back. I think it is $19 million. I think it is $19 million approximately.

Okay. Then just moving on to the gross margins, they were down, you have talked about some of the expenses associated with in the quarter. But they were at the lowest level that we have seen them for some time. How do you anticipate the gross margins going forward?

Well obviously impacting those gross margins are the heavy investment and implementation cost. Since those are front loaded in maybe the GAAP earnings cycle, we would expect it is front loaded on the expense side and back ended on the margin side.

Okay. Then just a final question, is, you tried a relationship with MasterCard for some time and you made an official statement this week or a press release this week. Can you just provide some of the background behind that relationship and what you are doing for for their debit platform?

Let me answer that one. MasterCard is another very good example of the 18 month pig in the python. We entered into a deal 18, just about 18 months ago with MasterCard . And MasterCard put a release. and we put out a release this week that both of these releases are signaling the completion of that endeavor between the two of us. We have actually been doing, this is something new we are doing for Mastercard. We have been supporting MasterCard on the debit switching side I think for 12 or 14 years so we have had a fairly long relationship with them. What this is doing, we are signaling just a basic, a couple of weeks ago that we are at the completion, we are at the completion phase of that project. I don't know if Richard or Mark wants to add anything more about that. But MasterCard is a, as is Visa, MasterCard is a major customer of ours.

I would just a couple el of comments to clarify that. It is a licensed customer. So it is the relationship is as if typical customer and does involve BASE24-eps. So as Phil said it has been a long project like these big ones and it is coming to its fruition finally.

Great. Thank you.

Your next question comes from the line of Nik Fisken with Stephens Inc.

One quick follow up. If I look at the December-quarter slides, you guys pointed to 15 to $20 million of delay due to faster pay in the Middle East switch. Can you give an update on that?

We said it was delayed second quarter of this year.

You said delayed until first half '08. So it is second quarter?

Well, second quarter. I think May. We are triggering we are not being cute there, nick we are triggering off of Great Britain's time line. I think is May 20. I don't know the exact date.

But it is assume the situation in the Middle East with the situation there. It all depends on the actual central body going live.

Okay. The point is that was not recognized in Q1?

No. No, it was not.

Perfect. Thank you.

At this time, there are no further questions. Are there any closing remarks?

We thank everyone for being on board and whereas we said that faster pay was not in the quarter, we will also tell you the sortie switch was not in the quarter either. That's what Richard was eluding to in terms of outlooks. That was another one of these large multibank. I think there are 10 or 13 banks involved in that project. Thank you everyone.

This concludes today's ACI Worldwide financial results Q1 2008 conference call. You may now disconnect.